Reading tea leaves in energy markets

  • Republicans are unable to repeal the Inflation Reduction Act.
  • John Kerry’s idea to finance carbon reductions may have a chance.
  • Oil and gas companies will find it difficult to compete with renewable resources that have fixed capital costs but no variable costs.


US public opinion “experts” and pundits pontificated ahead of last week’s election. Then they pontificated afterwards. explaining what they did wrong. They get paid both times. Nice job if you can catch it. Well, if they can do it, why can’t we? Here’s how we read the tea leaves with respect to energy and electricity policy based on recent events.

  1. Abandon dreams of Republicans repealing the Inflation Reduction Act. They don’t have the votes to do that, and by the time they might have the votes, energy players will have gotten used to all the benefits in the form of tax credits or other handouts. Whether it’s, for example, oil depletion allowance, ethanol subsidies, or simple farm support payments, industries and groups are extremely reluctant to pass up attractive economic benefits. And if you were betting that a politically resurrected Donald Trump returns chanting “Drill, baby, drill,” keep in mind that the owner of the leading conservative news outlet, Rupert Murdoch along with others politically prominent, appear to have lost interest in his candidacy, so don’t count not even on that.
  1. John Kerry’s idea to finance carbon reductions may have a chance. Kerry’s plan would require big companies to pay for carbon emission reductions in overseas power grids instead of reductions at home: the details are fuzzy. (This idea closely resembles the idea of ​​a carbon offset purchase where an industrial polluter, say Gary, IN, buys and conserves a rainforest in Indonesia to save it from logging and of course maintaining a solid sequestration of carbon.) Doesn’t sound like a great idea except there are many old fully depreciated coal-burning power plants that could be replaced economically with great environmental benefits if the host country had the capital to do so. We view this as a serious attempt to achieve substantial reductions in carbon emissions through a trading or trading scheme that yields real emissions reductions, instead of planting slow-growing trees somewhere in a dying forest that may still burn due to the change. climate. This kind of transnational approach addresses the problem of what we might call pollution arbitrage, where pollution-intensive industries simply move to places where it is relatively cheap to pollute. Hopeful thinking? Critics say the plan isn’t enough, but this is a start.
  1. Public relations can only replace substance for so long. The fossil fuel industry and its backers have staged a colossal public relations campaign centered around the United Nations climate conference in Egypt. They no longer deny the reality of climate change or the negative impact of fossil fuel use, but instead offer non-decisive solutions. To us, this campaign indicates at least some level of corporate concern. Why else invest in this vast PR effort? But then they offer the usual remedies: planting trees, burning natural gas (albeit partially disguised as hydrogen), and more carbon capture (which still looks like vaporware to us). Four Republican members of Congress attended the climate conference, offering their conservative solutions to the global climate challenge. They argued that the problem isn’t carbon-based fuels but their emissions, so they offered some complicated and expensive ways to reduce emissions. One might think that, as conservatives, they would come up with a simple, low-cost, minimally invasive solution, which would suggest avoiding burning fossil fuels in the first place. Conceding causality may have been a strategic mistake.
  1. Real accountability of investments is needed. The investment and banking approach to net zero has been denounced as a “claptrap” in the world’s leading financial publication. Now, some of you may have come to this conclusion some time ago, and perhaps we have been slow to get the message across. But it seems that a multitude of smart bankers and advisors may have found a way to profit from climate change, appear virtuous and yet accomplish nothing concrete. Why should we care about what could be described as low-level financial shenanigans? Well, US securities regulators are tasked with ensuring that investors are not intentionally misled. Regulators can set standards, which could lead investors to actually reduce investments in fossil fuel producers, which would increase their cost of capital. (How could investors not invest in an economic sector as vital as energy? Handily, because oil and gas inventories make up only about 3% of the value of US stocks. That’s down from about 15% in the 2008.)

Here is the basic problem for consumers. The war in Ukraine and the OPEC overrun drove up oil and gas prices. These two events may give a boost to local fossil fuel production, but only temporarily. How come? Because in the long run, persistently high energy prices make non-fossil energy (renewables, green hydrogen and even the new nuclear) more competitive. There’s an old Wall Street saying, the solution to high prices is high prices (i.e. creatives find cheaper substitutes). Once non-fossil energy resources are available, they will remain in use for decades. Oil and gas companies will find it difficult to compete with renewable resources that have fixed capital costs but no variable costs. Once they lose market share to renewable energy resources, they will never get it back. Commercially speaking this struggle is very existential for the fossil fuel industry.

Will a divided Congress mean a government that is unsympathetic or simply indifferent to energy interests? Are there possible breakthrough technologies in nuclear energy and battery technology that can become breakthroughs for energy production and storage? Hopefully a losing strategy, lame PR campaign in lieu of substantial environmental cleanup, will be rolled back. Investor greenwashing is also likely to come under increased regulatory scrutiny, and this speaks volumes as regulators themselves have consistently ignored calls to regulate cryptocurrency exchanges which have caused losses for billions of investors. As a result, we can confidently say that tea leaves predict a dark future. So say the experts.

By Leonard Hyman and William Tilles for Oilprice.com

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